The role of the exchange rate in inflation and monetary policy in Russia

Gayanova, Elina
Russia has passed through a difficult political and economic transition for the last three decades. The collapse of the USSR deteriorated the economic structure that had been built within 70 years. The main aim of Russian monetary authorities has been to restore economic and financial stability of the country. The major obstacles in achieving stable economy have been fluctuations in exchange rate and high inflation rates. The aim of this study is to analyze the main factors those influence inflation in Russia and test the hypothesis of an asymmetric monetary policy stance with respect to exchange rate fluctuations for the period 2001-2015. The data obtained through a Vector Autoregressive Model (VAR) with the variance decomposition (VDC) and impulse response function (IRF) on inflation show that the supply side factor, exchange rate, is the most important factor on the inflation rate. Further analysis reveals that Russian inflation is more affected by the exchange rate depreciation. Especially after the Global financial crisis of 2008, the effect of the currency depreciation on inflation dynamics became very high. Furthermore, the Central Bank of Russia exhibits an asymmetric behavior towards the dynamics of the exchange rate in the period under investigation. It tolerates appreciation and applies aggressive measures to curb depreciation. Further analysis of the two separate periods demonstrates that before the Global financial crisis of 2008 the CBR had mostly symmetric response to currency changes, while during the period after the crisis, Bank authorities started to tolerate appreciation, and respond depreciation. 
Citation Formats
E. Gayanova, “The role of the exchange rate in inflation and monetary policy in Russia,” M.S. - Master of Science, Middle East Technical University, 2016.